The Companies Bill, 2011 proposes a refreshingly new approach to the office of independent directors. In a significant departure from Clause 49 of the Listing Agreement with stock exchanges enforced by market watchdog SEBI, the Bill does not make any distinction between executive chairman and non-executive chairman in the matter of mandating minimum strength in the board of independent directors.
The listing agreement mandates at least 50 per cent of directors to be independent where the company has an executive chairman, but settles for a modest one-third if the chairman is not an executive or whole-time or managing director of the company.
The assumption underpinning this seemingly solemn distinction is that the chairman calls the shots in the company, especially at board meetings. The truth is the Chairman's role is vastly ceremonial except when hostilities break out between groups controlling the company. To be sure, he also exercises an extra or casting vote to break the logjam in case of a tie but that, by itself, is not significant as to have bearing on the strength of independent directors on the board of directors.
A company is controlled by the dominant shareholder and his associates, period. The Bill, therefore, settles for a modest minimum one-third strength for the independent directors on the boards of listed companies, no matter what the chairman is — executive or non-executive — while leaving the minutiae to the Central government with regard to unlisted public companies.
The farce of foisting the family members of promoters as independent directors would no longer be allowed to be enacted now, as independent directors would have to be those who are not related to the promoters or directors of the company.
A class by themselves
In the new scheme of things, independent directors would be a class by themselves and have to be appointed as such. They would enjoy an uninterrupted tenure of five years. They are not required to retire by rotation. This is as it should be. One wishes that in line with this thinking, their removal too were made as fool-proof as possible lest an ‘inconvenient' independent director is got rid of.
The tenure of five years is not sacrosanct in that, with a special resolution in the general meeting, he can be reappointed for another five years. Special resolution, demanding as it does a 75 per cent majority, has never been a problem for companies, given the general shareholder apathy in the nitty-gritty of administration.
What is more, after functioning as an independent director for an aggregate term of 10 years thus, one can start all over again after a cooling-off period of three years.
The danger of such indulgence is development of a cosy relationship with the promoters and working directors. It would have been in everyone's interest, had the term of independent directors been confined to five years, without any latitude for self-perpetuation with its dangerous implications for surrender of independence.
The Bill must be lauded for bringing about clarity on the vexed issue of liability of independent, and non-executive directors who are not independent, by stating that they shall be liable only in respect of such acts of omission or commission by a company that had occurred with their knowledge, attributable through Board processes, and with their consent or connivance or where they had not acted diligently.
The issue of liability
This seemingly innocuous provision in the offing has already started sounding alarm bells in the quarters concerned, much to the merriment of insurers, with liability insurance perceived as the panacea.
Levity aside, the move is welcome inasmuch as no part-time director on that excuse alone can allow grass to grow under his feet a la the fabled Ivy League independent directors of Satyam Computers.This sets at rest every vestige of conflict of judicial opinion on this issue, besides warning the wannabe independent directors that the office is neither a sinecure, nor a bed of roses.
They must bring something to the table because each one is under the watch of the board. And more importantly, the absence of full-time devotion cannot be used as a fig leaf to cover up their foibles and lack of interest.
Wake-up call
That they are supposed to be a pressure group on working directors is apparent from the mandate contained in Schedule IV, calling upon them to meet at least once a year separately without the influencing presence of the working directors. They are also expected to play a major role in the audit committee in which not less than two-third representation must be given to them conforming to the extant provisions.
All in all, the Bill must be hailed as shedding shibboleths and giving a wake-up call to independent directors, especially to those who wear the status as a badge of honour and strut in corporate corridors with singular nonchalance.
(The author is a Delhi-based chartered accountant.)